Comment: Stocks merry–go–round may lead us forward

Bill Jamieson

BILL JAMIESON

Onwards and upwards: just when cautious counsels like me were warning of a stock market correction after a barnstorming start to the year, the FTSE-100 surged another 1 per cent last week to hit 6,347.

It is now up 7.6 per cent since 1 January and has had its best start to the year since 1989. Could this be followed by an upturn in the economy? Indeed, might it spark the very revival of business confidence we have been longing for to kickstart a recovery?

Fierce debate has broken out as to how resilient this surge will prove. For every adviser warning “don’t rush in”, another points out that a positive January for shares is more often than not followed by a strong performance over the year as a whole.

Since the FTSE-100 was created in 1984. It has risen in 18 Januarys out of 30. Of the 17 positive starts to the year (not including this one) 14 saw shares in the subsequent 11 months deliver a positive return.

Now, an 80 per cent hit rate is not to be dismissed lightly. But, as the official warning carried on every piece of stock market advice points out, the past is no guide to the future.

However, a rally of this strength and magnitude, echoed in most stock markets round the world, speaks to changing investor confidence. And what makes this change all the more remarkable is that it is strikingly at odds with economic reality.

Almost every economist has warned of a miserable 2013, with growth forecasts downgraded, household finances under siege, the retail sector in misery and any hope of recovery kicked well into next year. The investment charge is being led in the full expectation of economic stagnation for as far ahead as we can see.

How do we square a stock market rally with economic misery? This change in mood has not come overnight. It has been building for months, though the rally of the past few weeks has been fuelled by a wider recognition of the change in sentiment. Self-feeding? Of course it is. For in a rising market, who does not wish to join in?

In more polite circles it goes by the name of “animal spirits” – and their release at low points in the business cycle such as now is considered to be efficacious.

It does not mean, of course, that after this rally we can now expect an improvement in the real economy any time soon.

Like private investors fretting and doubting before taking out an equity ISA, businesses have suffered similar spells of deep doubt.

Business investment has fallen to historically low levels and for good reasons. Like private investors, corporate chiefs have been markedly pessimistic, unable to see how consumer demand would recover to lift sales or where returns could be made on new investment.

The result has been that many FTSE-100 businesses have built up very substantial cash holdings, holding back for confidence to return and for economies to show recovery. They have been waiting for a sign.

But would hard-headed business managers really see a good run for shares in a notoriously fickle market as such a sign?

Out of less robust materials have great change catalysts been made. For all the gloss that business school courses and earnest management studies put on corporate decision-making and “evidence-based strategy”, the corporate business manager is still an animal at heart.

They are driven by the same emotions of fear and greed as the rest of us. They are not somehow removed from the fray or standing aloof from such changing tides. They are part and parcel of them.

If the great banking crisis exposed anything, it was the abject vulnerability of investment bankers to such tides and their surrender to the fevers of the age. That they paid themselves enormous bonuses to go along with the herd shows how deeply infected they became.

Improved sentiment in the stock market may be just the catalyst for the release of business investment we have been waiting for. Companies will feel that some of those huge cash piles could be put to better use. For managers with a more modest cash pile, they will sense that, with an improving appetite for equity paper, they may venture to raise capital by way of a rights issue of shares.

Ambition will build. Companies will go to the market for a listing. The AIM market for fledgling companies – still in a very subdued state – will begin to attract investor and media attention.

Companies, seeing how their own share capital has acquired muscle, will be tempted to use this muscle for expansion and acquisition. And they will certainly not want their own share rating to lag those of their peers.

So back on the merry-go-round we go. A less fearful investor; a stock market rally; a spreading of the mood into corporate boardrooms – and a rally built on nothing in due course leads to something.

There will be other factors that will come into play, of course, before fingers are finally pressed on those corporate investor buttons. But a vital precondition may have been met, and an important first step may just have been taken in the past few weeks.

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